# Corporate Finance - Corporate Finance Section 2

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• Option : B
• Explanation : Operating income for 8 million cars = 8 million (25,000 – 14,000) – 15 billion = 73 billion. DFL = [Q(P - V) - F] / [Q(P - V) - F - C] = (Rs.73 billion) / (Rs.73 billion – Rs.65 billion) = 9.13.

• Option : A
• Explanation : For highly leveraged firms, that is firms with a high proportion of fixed costs relative to total costs, a small change in sales will have a big impact on earnings.

 Siptea Brewers Number of units sold 200,000 200,000 Sales price per unit \$150 \$150 Variable cost per unit \$43 \$98 Fixed operating cost 500,000 150,000 Fixed financing cost 100,000 50,000

• Option : B
• Explanation : DOL for Siptea: [200,000 (\$150 – \$43)] / [200,000 (\$150 – \$43) – 500,000] = 1.024. DOL for Brewers: [200,000 (\$150 – \$98)] / [200,000 (\$150 – \$98) – 150,000] = 1.015.

• Option : B
• Explanation : A is a true statement because higher leverage implies a greater interest expense and hence a lower net income. C is true because both companies have the same revenue and operating income. With similar assets, Asparagus has more leverage which means equity is lower. Hence ROE is likely to be higher, not lower, relative to Supras.